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Here's What Causing Pan American Silver Corp. to Lose Its Luster

Sean Williams, The Motley Fool

What happened

Shares of Pan American Silver (NASDAQ: PAAS), a precious-metal mining company with assets throughout North and South America, dipped as much as 10% during Thursday's trading session after the company released its third-quarter operating results. While some aspects of the report topped Wall Street's expectations, revenue was a key disappointment.

So what

For the quarter, Pan American Silver reported $190.8 million in revenue, down from $233.6 million in the prior-year quarter. The company attributed the drop to a decline in its silver and gold production during the quarter.

Discontinued production from Alamo Dorado, and a decline in output at San Vicente and Manantial Espejo, led to silver production of 5.89 million ounces, down from 6.36 million ounces of silver in Q3 2016. Similarly, gold production dropped to 40,800 ounces from 50,400 ounces year over year.

A silver bar on a dark background.

Image source: Getty Images.

In terms of the company's bottom line, adjusted earnings totaled $23.3 million, or $0.15 per share, which was down considerably from the $46.7 million, or $0.31 per adjusted share, reported in the year-ago quarter. Consolidated all-in sustaining costs per silver ounce sold (AISCSOS) also rose to $8.69 in the recently completed quarter from $6.34 in the prior-year period.

Comparably, Pan American Silver's adjusted profit surpassed expectations by $0.01 per share, but its total sales missed the mark by $8.6 million. Clearly, this was a disappointment, with the company in the process of expanding production at its Dolores and La Colorada mines. 

Now what

Despite a somewhat mixed, but ultimately disappointing, quarter in Wall Street's eyes, there are two important takeaways that should please shareholders. First, year-to-date AISCSOS of $10.77 is well below the company's original full-year guidance of $11.50 to $12.90 an ounce, issued in January 2017. Pan American Silver has done a good job controlling costs despite its expansion, primarily as a result of a reduced capital-project budget.

An excavator loading a dump truck in an open-pit mine.

Image source: Getty Images.

Secondly, the company really cleaned up its balance sheet during the third quarter by repaying $40 million in debt, which included capital leases. Just $7.5 million in debt remains next to $186.3 million in cash and short-term investments. Pan American Silver is well-positioned to put its money to work via organic mine development, which bodes well for future operating-margin expansion.

Though production hiccups are rarely a one-quarter event with precious-metal miners, Pan American Silver is certainly capable of delivering mid-to-high single-digit growth moving forward if its stays on track with Dolores and La Colorada, and it reignites growth at San Vicente. In other words, value investors could see modest returns here if they're patient.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.